ITX Insights - May 2024
In focus: Monitoring and managing Permanent Establishment risks through GECs
Note: This article provides a generic and high-level overview of the topic. You are strongly advised to consult a qualified Tax Consultant to receive relevant advice for your specific circumstances.
In the complex landscape of international taxation, one of the key challenges for international organizations is the risk of creating a Permanent Establishment (PE) in foreign jurisdictions. Even if a company is not considered tax resident in a particular country, its activities may trigger tax liabilities if they meet the criteria for creating a PE. This underscores the importance of understanding and managing PE risks, especially in the context of a global workforce.
It is widely acknowledged that, in this respect, GECs can make life a lot easier by acting as the single entity that employs and deploys employees of various nationalities, rather than deploying them from their respective home locations. In addition, the centralization that is implied in the GEC model usually provides better visibility and understanding of PE risks. In a survey of 32 companies conducted by ITX in March 2023, 71% of responding organizations reported that the GEC model had helped them achieve, or partially achieve, mitigation of PE risk.
A PE typically refers to a fixed place of business through which a company conducts its operations. Over time, the concept has evolved to encompass broader activities, including those conducted through employees, agents or contractors. For multinational corporations, the risk of creating a PE arises when employees or contractors perform activities in a foreign jurisdiction that exceed certain thresholds set by local tax authorities. For organizations with employees and contractors working across multiple overseas jurisdictions, assessing PE risk becomes particularly challenging. Whether engaged directly by subsidiaries, through Employer of Record (EOR) arrangements, or as subcontractors, the activities of these individuals may contribute to the establishment of a PE. Tax authorities often scrutinize these arrangements, treating all services provided by overseas workers as attributable to the organization, when assessing PE exposure.
While Global Employment Companies (GECs) don't eliminate PE risk, they usually deliver streamlined and efficient ways of assessing, monitoring, and managing such risks within a global workforce. In organizations deploying workers from diverse home countries to various host countries, the permutations of home-host relationships can be overwhelming. GECs simplify this process by centralizing employment under a single legal entity, reducing the number of home-host permutations to monitor and manage.
Moreover, GECs maintain centralized information repositories, facilitating more efficient risk assessment and mitigation processes. Clear and transparent transfer pricing rules, coupled with defined cost recharging mechanisms, ensure consistency and compliance across assignments. These streamlined processes, managed by expert teams within GECs, enhance transparency and accountability, reducing the likelihood of inadvertently triggering PEs.
It is important to emphasize that GECs are not tools for tax evasion, but rather strategic enablers to navigate the complexities of international taxation and ensuring compliance with relevant regulations. As organizations expand their global footprint, leveraging the expertise, resources, and streamlined processes of GECs becomes imperative for effective risk management, in today's interconnected world.
If you are evaluating the feasibility of a GEC and would like some guidance on how to approach it, please feel free to reach out to an ITX consultant.
Dispelling the Myth: Are GECs suitable only for specific industries?
In the domain of Global Mobility, Global Employment Companies (GECs) have often been assumed to be exclusive to specific industries such as Oil & Gas, Mining, and Engineering. However, this perception fails to capture the broader reality of the impact and value that GECs deliver every day across a diverse array of industry sectors.
In fact, a comprehensive review of 90 organizations sheds light on the true extent of GEC adoption, revealing their prevalence and effectiveness in industries beyond the traditional ones. GECs, at their core, provide a comprehensive framework for managing international employees, which benefits most organizations, ensuring compliance with local regulations, and facilitating seamless cross-border operations. While their origins may be traced back to industries with high demands for global mobility, such as Oil & Gas, the evolution of GECs made them indispensable tools for organizations spanning Automotive, Financial Services, Telco, Manufacturing, Retail, Life Sciences, Transportation & Logistics, Chemicals, Commodities, and even NGOs.
The historical association of GECs with sectors like Oil & Gas can be attributed to these industries' early recognition of the need for efficient global mobility frameworks. With operations spanning multiple countries, companies in these sectors were pioneers in adopting GECs to address the complexities of international workforce management. The imperative for efficiency, flexibility, and scalability drove the adoption of GEC models, setting the stage for their broader acceptance across industries.
As these "early adopters" of GECs demonstrated the tangible benefits of streamlined global employment solutions, other industries took notice. The value proposition offered by GECs, ranging from compliance assurance to operational efficiency, resonated with organizations facing similar challenges in managing international talent. Recognizing the potential for efficiency gains, cost optimization and risk mitigation, industries outside the traditional GEC user base began to explore and eventually embraced these solutions.
Hence, the myth that GECs are exclusive to certain industries is debunked by clear evidence that demonstrates their widespread adoption across diverse sectors. While industries like Oil & Gas may have been early adopters of GEC models, the benefits and value proposition offered by GECs have transcended industry-specific boundaries, making them indispensable for organizations operating in today's globalized economy. GECs provide a scalable framework that can accommodate the evolving needs of businesses operating in dynamic global markets. Therefore, as organizations continue to expand their international footprint and navigate the complexities of global employment, GECs will remain essential tools in supporting organizational success across all industries.
Learning Corner: Social Security and benefits considerations for GEC employees
Note: This article provides a generic and high-level overview of the topic. You are strongly advised to consult ITX to receive relevant advice for your specific circumstances.
Managing international assignments involves a complex labyrinth of considerations, with Social Security provisions standing as a cornerstone for both employees and employers. As expatriates embark on assignments across borders, understanding the intricate web of regulations governing social coverage becomes paramount. How do these regulations intersect with the employment and deployment policies and processes facilitated by Global Employment Companies (GECs)? Let's try to unravel this complex topic.
At the outset, it is crucial to grasp that social security regulations are typically based on a territorial framework. This means that an employee is usually subject to the legislation of a single country, primarily the one where their professional activities are conducted. This serves to prevent dual participation in multiple social security schemes concurrently, ensuring clarity and consistency in coverage.
In principle, an employee dispatched abroad by their employer should fall under the social security system of the host country where they carry out their duties. However, exceptions to this territorial principle may arise, particularly in the presence of totalization agreements. Bilateral agreements between nations often extend coverage exclusively to nationals of the contracting states. Yet, exceptions such as Switzerland, whose agreements apply regardless of nationality, exist. This consideration notably influences the selection of Switzerland as an optimal location for establishing a GEC, among many other factors.
Adhering strictly to the territorial principles can lead to disparities in treatment among expatriates of varying nationalities in the host country. Additionally, maintaining insurance coverage from the employee's country of origin may prove challenging, with the social security scheme in the assignment country potentially falling short in providing adequate benefits. The absence of totalization agreements exacerbates the risk of coverage gaps, underscoring the need for a more comprehensive solution.
Recommended by LinkedIn
When designing a GEC, achieving consistency in social security treatment irrespective of the assignee's nationality emerges as an important consideration. The location of the GEC becomes relevant, as it can leverage favorable tax and social security regulations, treaties and agreements. Cost-saving measures, including reductions in mandatory social contributions, need to be considered, albeit within the confines of legal compliance. It is important to emphasize once again that a GEC does not absolve companies or employees from their social security and tax obligations; rather, it serves as a mechanism for optimizing structures within legal parameters, and for ensuring full compliance in all jurisdictions.
Striking the delicate balance between cost efficiency and competitive benefits remains a key objective. Employees of the GEC should not be disadvantaged in terms of social security entitlements, necessitating innovative design elements in international pension and protection plans. These initiatives must align with business objectives and budgetary constraints, ensuring that employees' expectations are met without compromising financial sustainability.
In the holistic design of a GEC solution, various factors demand consideration, from the choice of location to the formulation of policies, processes, and compensation packages. The overarching goal is to create a framework where employees are adequately protected, deployments are financially viable, businesses remain compliant, and operational efficiency is optimized. Achieving this equilibrium necessitates a careful approach to GEC design, grounded in a thorough understanding of the intricate relationships between social security regulations and the dynamics of global employment.
Ultimately, navigating social security considerations within the domain of GECs requires a multifaceted strategy. One that prioritizes legal compliance, safeguards employee interests, and fosters operational efficiency. As organizations continue to operate in a complex global marketplace, the careful management of social security emerges as a critical success factor, ensuring that the welfare of employees remains a top priority.
ITX News: ITX is a Learning Partner in the 2024 World HR Congress – 14th to 16th May 2024
ITX will contribute its insights as a Learning Partner in the 2024 World HR Congress. In addition to sharing experience and perspectives with top HR leaders from all over the world during the 3 days of the event, ITX will also address a selected audience on the topic of “Beyond Shared Services – the SHIFT model to transform International HR Management”.
The accelerating pace of change is placing increasing stress on international organizations, highlighting gaps in their operating model, infrastructure and support mechanisms across global business units. Managing an international workforce has become more complex, and the outdated practices are bringing to light various challenges, such as low central governance, poor cost management, compliance gaps, and declining employee experience.
Historically, many organizations responded by moving transactional processes into Shared Service Centres, supplemented by Centres of Expertise (COEs) providing expert advice and guidance to business units. However, in the field of International HR and Global Mobility, many of the world’s leading organizations have gone one step further and implemented their own Global Employment Company (GEC), which offers all the benefits of Shared Services and COEs, plus a few more. In this session we explore the key concept of a GEC, and an innovative “SHIFT” model that creates value beyond what most Shared Services and COE combined can deliver.
ITX and Client co-presenting at the Magellan Institute (Institut Magellan) on 28th May 2024
ITX has been invited to address the International Mobility Club of the Magellan Institute, on the topic “Global Employment Companies: Advantages, disadvantages, and operational management”. The presentation will also include some insights from one of ITX’s prestigious clients, who will provide useful and practical perspectives on the topic.
Status Update - Research Project: How do companies make decisions about GECs?
As reported in previous newsletters, ITX spearheaded a research project to gain insights into the genesis and evolution of GECs within various organisations. A full report will be produced in August 2024, and distributed to organizations that participate in this study.
The data collection phase of the project closed on 15th May 2024. Approximately 100 organizations provided their valuable insights, which will be featured in the report, available in mid-August 2024 to survey participants.
The goal of the research is to understand the level of awareness on the topic of GECs, and which factors influence, whether a specific organization will establish a GEC. Some of the areas explored in the study include:
What difference could a GEC make? Find out in less than a minute.
There could be many good reasons why your organization does not use a GEC today. But are you able to articulate, hypothetically, how a well-designed GEC could potentially address some of your key challenges? Take a quick self-assessment and receive a free customized report with some initial suggestions, in less than a minute. The automated report cannot replace a detailed consultation, but it will provide some insights on how GECs are delivering value to many international organizations around the world every day.